The multiple activities of VSEs in the face of capital gains tax exemption

A small business can benefit from a capital gains exemption on the sale of an asset, but this is subject to specific conditions. Recently, the Conseil d'Etat had to intervene to clarify these conditions in a case where a very small business carried out several activities.

The facts

After two rulings against them, one by the administrative court and the other by the administrative court of appeal, a couple of plaintiffs saw their request for a discharge of the additional income tax assessment to which they had been subject following the sale of their business rejected by the Conseil d' Etat in a ruling dated October 4, 2023.

It turns out that the plaintiffs sold their farm, created in 1984, in 2016, at the same time as their ancillary business of producing and selling photovoltaic electricity, which had been developed since 2012, i.e. 4 years before the sale.

The Conseil d'Etat's decision

The Conseil d'Etat reminds us that, in order to benefit from a total exemption on capital gains, each activity must have been carried out for a period of at least 5 years.

Eligibility for the capital gains exemption is assessed on an activity-by-activity basis. In this particular case, electricity production has only been in existence for 4 years, so the related capital gain is due. In the case of the sale of an entire business, in which two distinct but closely related activities are operated, the tax authorities apply capital gains tax to the activity that is less than 5 years old.

Companies subject to income tax - which is the case for many very small businesses - benefit from total exemption from capital gains tax on the sale of an asset when revenues (excluding VAT) do not exceed €250,000 for BIC and agricultural businesses, or €90,000 for BNC. The exemption may be partial or degressive if your sales exceed €250,000 but are less than €350,000, or exceed €90,000 but are less than €126,000.

It should also be noted that taxation differs according to the company's tax regime: income tax (IR) or corporation tax (IS). However, this is still a business capital gain, which is likely to be subject to tax and deducted from the account dedicated to the business. Capital gain is the difference between the purchase price and the sale price, when the latter is higher.

Another factor influencing capital gains is the sale price. If it is less than €300,000, the capital gain is fully exempt. If it is between €300,000 and €500,000, the fraction between 0 and €300,000 is exempt, then a progressive rate is applied up to €500,000.

Last but not least, managers who sell their company to retire are automatically entitled to full tax exemption.